Hi everyone — welcome to another issue of Naavik Digest! If you missed our last one, be sure to check out our breakdown of EA’s recent reorganization and what it means for the sports publisher’s lineup and divisional structure. We also published a great interview with Nexon CEO Owen Mahoney on the Naavik Gaming Podcast that’s well worth a listen if you haven’t already. 

In this issue, we’re diving into the ongoing Microsoft-FTC regulatory hearing and discussing how the antitrust fight could reshape Xbox — and the game industry. 

#1 Final Showdown in Microsoft’s FTC Duel

Written by Mario Stefanidis, CFA, Naavik Contributor

Microsoft is facing its highest-stakes challenge yet in its ongoing acquisition of Activision Blizzard. The company appeared in court starting June 22nd to defend its purchase against the Federal Trade Commission (FTC), a U.S. agency responsible for antitrust enforcement. 

In particular, the FTC is seeking to levy a preliminary injunction on Microsoft, which would effectively put an end to the acquisition and result in a hefty $3 billion breakup fee to Activision. A preliminary injunction prevents a party from pursuing a particular action until a final judgment is issued, and Microsoft is working under a tight deadline to try and get the deal closed by the July 18th target date. 

The U.K. CMA’s block on the grounds of the deal’s cloud gaming implications is still wrapped up in the appeals process, and there are rumblings that Activision Blizzard games could be separated from the Xbox Game Pass offered in the U.K. (among a variety of other remedies). Yet a preliminary injunction in the U.S. combined with the CMA’s action would be too much to bear. Microsoft has said if it loses this week in court it may abandon the deal altogether. 

The FTC won a temporary restraining order to block the deal. This was issued on June 13th by U.S. District Judge Jacqueline Scott Corley, representing the Northern District of California. Furthermore, Judge Corley set June 22nd to June 29th as the window for a five-day hearing on the preliminary injunction.

Thus far, hearings have been held on the 22nd and 23rd and are set to resume on the 27th for three consecutive days. A preliminary injunction would compel Microsoft to wait for the court’s final decision, while the company only has until that July 18th date to close the acquisition, after which it would either pay the breakup fee or renegotiate new terms. For both companies, such an action would be too burdensome and would all but guarantee the termination of the merger.

While we have discussed the FTC’s challenge and the ramifications for Microsoft if the deal were to fall through in detail, the two days in the courtroom thus far have been revelatory. We heard testimony from several gaming executives and numerous documents (albeit heavily redacted) were unsealed.

The outcome of the case is not only important for Microsoft and Activision — the decision on the preliminary injunction will have significant implications for the gaming industry and the competitive landscape within it.

Day One (June 22nd)

Minutes after the courtroom proceedings kicked off, emails between current Sony Interactive Entertainment CEO Jim Ryan and former CEO Chris Deering were unsealed. In the exchange, Ryan revealed that he did not believe Microsoft’s acquisition of Activision is “an exclusivity play at all,” but rather one aimed at something “bigger.”

Furthermore, Ryan stated his confidence that Call of Duty would be “on PlayStation for many years to come.” This goes directly against Sony’s argument in front of the CMA last September, where it said that giving Microsoft control of the franchise would have “major negative implications for gamers and the future of the gaming industry.” 

Ryan alluded to Sony’s acquisition of Bungie, saying it would be “more than OK” following the purchase. For reference, the Bungie deal cleared the FTC last July, about six months after it was announced.

Most gamers understand that Microsoft has not fared as well as the competition in the so-called console wars, but it was still shocking to hear the admission come directly from the company. In a filing, Microsoft stated that Xbox “has consistently ranked third in consoles behind PlayStation and Nintendo.” It also broke out its market share for the first time. In 2021, the Xbox comprised 16% of the console sales and 21% of the console install base versus undisclosed shares for Nintendo and PlayStation.

Positioning itself as a loser is a bold move, but one aimed at appeasing the court’s concerns that the combination with Activision Blizzard would result in an unstoppable video game giant. When questioned by FTC lawyers, Microsoft Gaming CEO Phil Spencer stated that Microsoft has lost the console wars “over the last 20 years,” which goes back to the seventh generation of consoles. Other discussions during the day’s proceedings centered around Xbox exclusivity for upcoming titles. 

In particular, Microsoft was asked about its upcoming Indiana Jones game, which was meant to be a multiplatform release, but switched to an exclusive after the acquisition of Bethesda. Bethesda VP Pete Hines was also asked about developing games like Starfield and Redfall as Xbox exclusives. He admitted that he didn’t understand why Call of Duty would remain multiplatform after the acquisition, given that Bethesda was explicitly instructed to keep its titles exclusive. Hines’ frustration with Microsoft’s exclusivity approach was further spotlighted in a February 2022 email in which he noted that the pledge to keep Call of Duty on PlayStation is the “opposite of what we were just asked (told) to do with our own titles.”

This argument — that Microsoft’s conditional exclusivity approach to Bethesda is evidence of what it might be incentivized to pull with Activision Blizzard — is arguably the strongest one the FTC has made so far, though Microsoft has gone to great lengths through its commitments to supporting other platforms to dispel that notion.

Day Two (June 23rd)

Spencer took the stand to testify, while PlayStation chief Jim Ryan and former Stadia product lead Dov Zimring were also on the witness list. Before Spencer’s testimony, however, Xbox senior finance director Jamie Lawver delivered around an hour of sealed testimony, as Judge Corley noted that her testimony exclusively contained “confidential financial information” and “internal business information.”

The FTC questioned Spencer about whether the Switch should be counted as one of Xbox’s competitors, given he admitted that its technological specs were “more akin to a Gen 8 device.” This argument, in my opinion, was one of the most nebulous of the proceedings thus far. Just because a console does not have the same fidelity as its competitors doesn’t mean it should be excluded from market share calculations. But part of the FTC’s argument is that Xbox and PlayStation compete in a “high-performance console” market, which necessarily means excluding Nintendo from considerations around market share, publishing deals, and subscription services.  

Furthermore, the case against Microsoft appears to center around console exclusivity and how that might affect the greater gaming market, and Nintendo has no shortage of exclusives on its platform. In fact, one could argue Nintendo’s numerous, critically acclaimed exclusives are the reason why gamers overlook the lackluster specs of the Switch.

Spencer was also questioned on Call of Duty exclusivity. The FTC, for seemingly the dozenth time, questioned whether Call of Duty would remain multiplatform or eventually become an Xbox exclusive. In a powerful move to the court, Spencer swore under oath that Microsoft would “continue to ship future versions of Call of Duty on PlayStation 5.” The oath comes despite Sony declining a 10-year deal that would secure the franchise for PlayStation in what essentially represents a gesture of goodwill without financial conditions.

Later in the day, the FTC questioned Stadia executive Dov Zimring on the Google cloud platform’s failure. Zimring stated that Stadia could not build a large enough content library despite having “the best technology in the market.” His testimony did not appear to be very effective, given that both PlayStation and Microsoft are players in the market for exclusive content.

Despite appearing on the witness list, PlayStation’s Ryan did not appear in court to testify under oath. This is because Ryan would only commit to appearing via a pre-recorded deposition. It’s unclear how much of Ryan’s deposition will be played in court, as at least some of it is likely under seal. 

Plans for Microsoft’s acquisition strategy were also divulged. Microsoft tried to buy Zynga but eventually realized it needed “something that was even bigger than Zynga.” As for ZeniMax, Microsoft acquired the company after its Bethesda subsidiary planned on skipping Xbox due to planned payments from Sony to keep the game exclusive. 

Internal documents released Monday revealed that many other companies were also on Microsoft’s radar, including Sega, Bungie, and a number of other targets. In an email to CEO Satya Nadella and CFO Amy Hood on November 20th, 2020, Phil Spencer expressed a desire to “accelerate Xbox Game Pass both on and off console.”

Microsoft spent much of day two successfully painting Sony as the one with a commanding market share and a cutthroat attitude toward exclusives. In fact, Spencer characterized Sony’s exclusivity dealmaking and general approach to PlayStation ecosystem growth as designed to “reduce Xbox’s survival in the market.”

Other court revelations were less relevant to the case at hand but shed light on Microsoft’s gaming pipeline. In particular, Bethesda’s next Elder Scrolls game is at least five years out and may come as a launch-day exclusive on the next-generation Xbox, though Spencer insisted that no firm decision had been made toward the title’s exclusivity. Microsoft also expects the next generation of consoles to come out in 2028.

In summary, last week showed the FTC’s case against Microsoft is anything but watertight. Unless this week results in some damning revelation against Microsoft or Activision, it is difficult to imagine Judge Corley granting the FTC its preliminary injunction. On antitrust grounds, Sony’s case holds little weight as it is the undisputed leader in console gaming. Microsoft did not have to present much evidence to this effect but did a compelling job in showcasing Sony’s dominance to the court.

If the deal falls through, these types of mega-deals within interactive media could become a lot less common, as few acquirers would want to be scrutinized the way Microsoft has been. If Microsoft and Sony then turn to smaller acquisitions à la ZeniMax and Bungie, the question then becomes: How many studios can these gaming giants acquire before the FTC puts its foot down?

#2 Top Movers & Deals: June 16th - June 23rd

Written by Mario Stefanidis, CFA, Naavik Contributor

• For the week ending June 23rd, 2023: The average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was -2.7%. The S&P 500 returned -1.4% and the Nasdaq-100 returned -1.3%. Full access to the Naavik Gaming Company universe is available here.
• Most gaming stocks fell last week, particularly those that had risen significantly since April. IGG, Unity Software, and CD Projekt, which were the three top gainers the week of June 16th, all fell by double digits. In Unity’s case, the move marked a reversal to the upwards movement following Apple’s Reality Pro announcement. For CD Projekt, the euphoria abated around the upcoming Cyberpunk DLC “Phantom Liberty,” whose release date was announced a week prior.
• Team17 Group (LON: TM17) rose by 7.0% after publishing Trepang2 on June 21st, a first-person shooter developed by Trepang Studios exclusively for Windows. The game received positive reviews from critics with a 77 on Metacritic, as well as rave reviews from gamers who rated it “Overwhelmingly Positive” on Steam. 
• Modern Times Group (STO: MTGB) rose by 5.9% after it was shortlisted by leading portfolio managers for Citywire’s Elite Companies Awards, in the category of EMEA Interactive Media.

Notable Venture Financings

• A number of new funds have been launched to invest in early-stage gaming startups:
  • India’s Lumikai, the country’s first gaming & interactive entertainment venture fund, launched a new $50 million fund that will target Indian pre-seed to Series A investments. Fund II investors include Krafton, Colopl, Supercell, Mixi, and individual investors such as former Take-Two CEO Ben Feder and Napster CEO Jon Vlassopulos. The five areas of investment will include: gaming content and digital media; UGC platforms and creator economy; tools, technology, and infrastructure; applied game mechanics and interactive touchpoints; and frontier bets like mixed reality and generative AI.
  • Newly launched London VC firm Boost Capital Partners raised $30 million to invest in mobile gaming startups. The fund was founded by former Initial Capital partner Alvaro Alvarez del Rio. Boost plans on writing checks up to $750k for pre-seed and seed companies, and the team has already made seven investments across Europe and Latin America. 
  • Avatar technology company Genies announced a new $1 million fund called the Genies Developer Incubator. Developers that are chosen for the incubator will gain early access to the Genies Dev Kit, allowing them to be among the first to launch mixed reality experiences for the Avatar Social Network. Selection into the six-week program also includes resources and mentorship from Genies to help bring projects to fruition. In April 2022, Genies raised a massive $150 million Series C led by Silver Lake at a $1 billion valuation, one of the largest web3 investments to date.
• Red Rover Interactive, a new studio based out of Oslo and Newcastle, raised $5 million in seed funding. The studio is led by CEO Fred Richardson, who was formerly CTO at Norwegian MMO studio Funcom. Red Rover plans on using the funding to continue building out its team, and to work towards its debut games-as-a-service survival title. The team currently has 17 employees, and is looking to fill seven additional roles based on its website. 
• London-based fashion gaming company Drest secured £15 million in additional funding to develop a new product. Drest Game 2.0 is set to launch in early 2024, as an improved version of its current offering “Drest: Fashion Styling Game,” a fashion game for iOS with collections from over 200 brands. The company reports that user growth has grown 250% year-over-year since its launch in 2019.
• Turkish mobile gaming startup Fuse received a pre-seed investment of $2 million co-led by NFX and Lakestar. The startup plans to use the funding to accelerate its game development process, by leveraging artificial intelligence to optimize player interactions and provide personalized gaming experiences. The studio released Poggies Unleashed for Android in May, a multiplayer shooter that features collectible characters.
• AI game platform Versed raised €1.6 million in pre-seed funding, in a round led by Google’s AI venture fund Gradient Ventures. Versed was founded out of the Netherlands by former Googler Robert Gaal and Unity developer Cat Burton, who serve as CEO and CTO respectively. The platform “empowers anyone to create their own role-playing video game,” based only on a user’s text input. The generative AI portion of the platform uses OpenAI’s GPT-4 and utilizes Unity as its game engine.

Notable Strategic Investments

• Animoca Brands announced a strategic investment in Japanese trading conglomerate Mitsui & Co. Through the investment, Animoca plans on partnering with Mitsui to help it “create new business that contributes to innovation and the uptake of web3 in the Japan market.” In particular, Mitsui will explore incorporating blockchain technology and digital assets into its core businesses. The press release from Animoca also states that the two companies would create joint ventures in various fields. Terms of the investment were not disclosed.

Notable Studio Updates & Partnerships 

• Electronic Arts announced a major internal shakeup, realigning its studios into two divisions: EA Entertainment and EA Sports. EA Games, which previously contained both divisions, will be renamed EA Entertainment. The new unit will contain EA’s non-sports studios including BioWare, DICE, and Respawn Entertainment, among others. EA Sports will contain EA Sports and its various regional studios, as well as racing game subsidiaries Codemasters and Criterion Games. The realignment also came with changes among its executives: CFO Chris Suh is leaving the company to pursue another opportunity, while Chief Experience Officer Chris Bruzzo is retiring. The duo will be replaced by Stuart Canfield and David Tinson, who formerly served as SVP of Finance and CMO, respectively. Furthermore, Laura Miele’s role changed from COO to President of EA Entertainment, Technology & Central Development.
• Nicola Sebastiani left his post as Head of Mobile at PlayStation Studios to pursue an executive role at an undisclosed company. This comes less than two years into his tenure in the role, when he was chosen to lead the newly established mobile division at PlayStation. A day later, his position was quickly filled by Kris Davis and Olivier Courtemanche, who both joined the company in April 2022 and will now serve as Co-Heads of Mobile. Thus far, Sony has acquired one studio for the division — Savage Game Studios in August 2022 — to create new mobile games based on existing PlayStation IP.
• French media technology company Webedia launched a new division called Webedia Gaming Europe, covering 15 European countries with headquarters in London. Industry veteran Catalina Lou will serve as SVP of Global Gaming and lead an international expansion for Webedia’s gaming ambitions. Lou previously held roles as EMEA Gaming Sales Director at Facebook, and various management roles at EA. 

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